April 12, 2019

Corwin: Controller’s Alleged Liquidity Crunch Not Enough to Raise Conflict

In English v. Narang, (Del. Ch.; 3/19), Chancellor Bouchard rejected allegations that conflicts involving a controlling shareholder & disclosure shortcomings should preclude application of Delaware’s Corwin doctrine to fiduciary duty claims arising out of the sale of a company.

The Chancellor dismissed claims alleging that sale involved a conflicted controlling shareholder premised on allegations that the controller’s need for liquidity prompted by his retirement as the company’s CEO prompted the sall, noting that the complaint “contained no concrete facts from which it reasonably can be inferred that [the founder] had an exigent or immediate need for liquidity.”

The plaintiffs also alleged that the company’s disclosures about the transaction were inadequate, and that as a result, the deal did not receive the fully informed shareholder approval required to invoke Corwin. This excerpt from a recent Shearman & Sterling blog reviews how the Court addressed those allegations:

Plaintiffs also argued that Corwin was inapplicable because the recommendation statement for the transactions was misleading and, therefore, the stockholders allegedly were not fully informed when they tendered their shares. For example, plaintiffs asserted that the financial projections included in the recommendation statement understated the company’s upside. But the Court found that optimistic statements by the company’s CEO before and after the transaction (referenced by plaintiffs) did not contradict the financial projections.

Moreover, the Court explained, the projections were the same as the ones provided to potential acquirors, and plaintiffs offered “no logical reason why any of the [directors] would want a lower price for the Company even if the Board had been rushing a sale of the Company.” Likewise, the Court rejected plaintiffs’ assertions that omissions of discussions with company management about post-closing employment rendered the recommendation statement misleading because the complaint did not allege facts demonstrating that any such discussions occurred before the merger agreement was signed.

The Chancellor also rejected challenges to the adequacy of disclosures about the work performed by the Company’s financial advisor for the buyer and its affiliates.

John Jenkins